Could a Private Bidder for St. Louis Lambert Airport Still Emerge? Five Things to Watch in 2020

ST. LOUIS MAYOR LYDA KREWSON surprised many people in December when she yanked the city out of a controversial bidding process to choose an investment group to lease St. Louis Lambert International Airport for the next four decades.

A public-private partnership (P3) deal would have been the first of its type for a major airport in the continental United States. Backers said the billions of dollars in expected investment from a private firm would have funded major terminal upgrades, paid off Lambert’s debt, and produced a bucket of cash for the city.

But activists, elected officials and some business leaders successfully fought the deal, decrying what they said was a secretive process that aimed to ram privatization through the city’s Board of Aldermen without a citywide vote. Opponents criticized in particular the involvement of philanthropist and political donor Rex Sinquefield and his Grow Missouri consulting firm. They claimed P3 was simply another step by Sinquefield, an advocate of limited government, to toss valuable public assets into the jaws of rapacious capitalists.

So the prospect of substantial private investment in Lambert is off the table. Or is it?

On one hand, Sinquefield and Grow Missouri have walked away, after paying an $11 million tab for consultants and studies as part of their “FLY314” process. The 10 or so viable prospective bidders who showed keen interest in Lambert last autumn have been told not to bother with formal proposals.

On the other hand, Krewson has maintained the active status of the city’s P3 application to the Federal Aviation Administration, the agency with the power to authorize privatization. And during the past week efforts by some public officials to explore alternatives to FLY314, such as a regional ownership model for the airport, appeared to stall.

The future of Lambert remains unclear. As 2020 progresses, here are five things to watch.

1. Could private bidders still make unsolicited approaches to the city about operating Lambert?

Yes, people familiar with the FLY314 process told McPherson, although they cautioned the chances are slim. These people, who spoke on condition of anonymity, say one or more bidders who have already put considerable work into studying Lambert may reason they have little to lose by making an informal approach to the city. Such an approach would lay out non-binding conditions under which the prospective bidder would be willing to assemble a formal proposal.

One factor making this plausible is that a city working group which oversaw the P3 process recently released a trove of previously confidential information on the FLY314 website. Interested parties now have free access to over a year’s worth of detailed records including the working group’s strategy documents, the city’s expectations for a cash windfall, and a crucial “framework” agreement with airlines including Southwest and American that lays out the lucrative benefits they would receive in exchange for their blessing on P3.

Of prime interest is a 365-page “vendor due diligence” report from consulting firm Ricondo & Associates that the working group intended to provide confidentially to bidders to help them develop their proposals. It provides a detailed analysis of the airport’s current operations, as well as scenarios for terminal rebuilds and projections for higher revenue and profits.

In its “central case” scenario, Ricondo projects that a private operator could double its pretax profit at Lambert between 2022 and 2032 to $190 million annually (not adjusting for inflation).

The scenario envisages a smaller, more efficient Lambert. All flight, baggage and passenger security operations would be consolidated at Terminal 1 (see image below). The renovated terminal would include an expanded dining and retail area serving all travelers, plus new parking garages and an adjacent consolidated rental-car facility. The Terminal 2 building that now handles Southwest flights would be repurposed, possibly as a hotel or conference center.

Is talk of an informal approach mere wishful thinking? Yes, if potential bidders conclude St. Louis is too risky a bet. One person familiar with the FLY314 process told McPherson a lack of trust in city leaders to get a deal done is a “fundamental stumbling block” for private firms that were disappointed by Krewson’s decision to withdraw.

To be clear, there is no indication an approach is on the way. McPherson contacted four investment firms that showed interest last fall and that scored highly in an initial review of bidding groups by the city’s advisors, to ask whether they would still be interested in pursuing bids for Lambert. Spokeswomen for three firms – Blackstone, Oaktree and Partners Group – declined to comment. A fourth firm, PSP, did not respond.

2. How much cash did the city leave on the table when Krewson pulled the plug?

A lot, by the look of things. One working group resolution from August said the city was targeting a minimum of $1 billion “for non-airport uses.” Part of this hoped-for windfall would likely have been paid up front, with the rest in installments over the term of a 40- or 45-year lease. (To put this in perspective, $1 billion is almost twice the size of the city’s general fund, which budgets roughly $500 million each year to pay for the city’s everyday operations.)

A private operator would also be required to pay off Lambert’s approximately $600 million in debt. Most of this was taken on to build the infamous (and little-used) 11-29 runway that opened in 2006.

Ricondo lays out a business strategy for a private operator that boils down to three key elements: Pay off the airlines so they’ll support privatization and keep adding flights; get a higher share of Lambert’s users to park at the airport and charge them more to do so; and sell a lot more food, booze and trinkets to travelers once they’re inside the terminal.

The consultants’ calculations suggest that private operators would have needed to put forth bids promising a minimum investment of $2.7 billion to $3.1 billion in order to be considered viable. [The graphic below breaks down these calculations in more detail.)

It’s conceivable that a private operator could leave out some of the less profitable aspects of an airport rebuild. Jettisoning the proposed $382 million rental car facility, for example, would shave roughly a third off projected construction costs. And it would avoid the need to slap new charges on rental cars to pay for the facility; Ricondo’s report mentions an extra fee of $5.50 per day on each vehicle.

3. How much appetite remains among city officials to pursue a privatization deal?

This depends on who’s doing the talking. Krewson, who plans to run for re-election in 2021, cited concerns about the FLY314 process from residents, business leaders and other elected officials when she announced her decision to pull the plug in December.

Asked how the city would react to an unsolicited approach, Krewson’s spokesman Jacob Long poured cold water on the idea. Calling it a “hypothetical situation,” Long told McPherson “we’re not even sure what the process or procedure would be for an unsolicited process.”

Regarding the FAA application, he reiterated that Krewson intends to review it. “Nothing requires us to withdraw it at this point,” Long said.

Some city officials including Comptroller Darlene Green have steadfastly opposed P3. But Board of Aldermen President Lewis Reed and others including the local chapter of the NAACP remain enthusiastic backers of exploring privatization, in part because they hope the city would use a portion of any windfall to invest in impoverished neighborhoods. In January Reed complained to the St. Louis Post-Dispatch that the decision to end the P3 process leaves the city without “a realistic road map” for improving Lambert.

Last week Reed and Krewson both voted in favor of a successful motion to table a proposal to explore regional governance of Lambert at a board meeting of the East-West Gateway Council of Governments, the region’s federally-designated planning agency. Backers of the proposed study, including St. Charles County Executive Steve Ehlmann, hope an effort led by East-West Gateway would produce better alternatives for Lambert than P3.

Under its current management Lambert is efficiently run and has attracted more flights from Southwest in recent years, driving a steady increase in the number of connecting passengers. The airport also has a small but growing cargo business. Still, competition from other airports is stiff. In recent passenger surveys by J.D. Power and The Wall Street Journal Lambert earned mediocre marks relative to its peers. In January, Tom Santel, executive director of business group Civic Progress, told the St. Louis Business Journal that “nobody wants the status quo” to continue at Lambert.

Yet there is no clear support for privatization from the region’s business leaders. One key opponent to Grow Missouri’s plans has been Andrew Taylor, executive chairman of rental car operator Enterprise Holdings. The Business Journal first reported on Taylor’s involvement in late December; at that time Taylor said in a statement he looks forward to working with Krewson and others “to make sure Lambert Airport can continue to be a strong asset for our hometown’s future.” A spokeswoman for Taylor declined to provide additional comment when contacted by McPherson for this article.

In at least two major respects, the concerns of community activists who fought FLY314 have been addressed. Sinquefield and Grow Missouri are out of the picture. And P3 opponents who wanted access to confidential records now have them.

4. Even if one or more prospective bidders express interest, how could a privatization process get restarted, with Sinquefield and Grow Missouri no longer writing the checks?

Aside from Krewson’s reluctance, this is the biggest potential obstacle. When the FLY314 process was still alive, the big fees charged by consultants came in for heavy criticism. Because Sinquefield was bankrolling the project, however, the cash-strapped city assumed no financial risk.

If a prospective P3 operator wants the airport badly enough, it could offer to reimburse some or all of the city’s fees for new consultants up to a specified limit. This would be exceedingly risky, though. Any agreement could be voted down in the Board of Aldermen or in a possible ballot measure put to city voters.

An alternative scenario could involve meaningful improvements to Lambert without privatization. Civic Progress and another group, the Regional Business Council, have said they’d be willing to pay for a study of privatization alternatives, and last week the Post-Dispatch reported remarks by Krewson that a $5.5 million study by WSP, a Canada-based engineering firm that has worked on airports in London and Toronto, is “about to kick off.” Krewson spokesman Long said the city is not ready to make a formal announcement on this, though.

This suggests Krewson and her business allies see scope for a plan to improve Lambert that would rely on the airport’s existing borrowing capabilities, which got a double boost last year when credit-rating firms Fitch and Standard & Poor’s upgraded the airport’s bonds. In theory this plan could still result in flights being consolidated at Terminal 1, and perhaps the replacement of the terminal’s antiquated parking garage. (It might even allow for some type of role for a private investor.)

But such a plan would be inferior to P3 in at least two respects: It would add to Lambert’s debt, and it would provide no windfall for the city.

5. What will it take for business leaders like Rex Sinquefield and Andy Taylor to come to an accommodation about the best way forward for Lambert and the region as a whole?

This matters just as much as turf battles among local politicians, because it gets at the heart of a broader challenge: Who should set the agenda for the St. Louis area, and who should have a seat at the table?

Across the region there are encouraging signs of progress including the National Geospatial-Intelligence Agency campus now under construction, the 39 North plant science hub in Creve Coeur, the Taylor-backed Major League Soccer team coming in 2022, and brisk investment in neighborhoods across the city’s South Side.

In other respects, however, controversies and setbacks over the past year have left the region divided and on edge. These include the aborted Better Together government merger plan championed by Sinquefield (and supported by Krewson), the conviction of St. Louis County Executive Steve Stenger on federal corruption charges, and a string of children killed in city gun violence last year.

One reason for this division may be that campaigns of opposition have tended to be more successful recently than campaigns of advocacy. As a result, St. Louisans are left with hazy outcomes instead of concrete solutions. To wit: Airport privatization is taken off the agenda; an alternative plan then stalls at East-West Gateway. Better Together implodes; its presumptive successor, the Board of Freeholders, then gets mired in city politics. In 2017 municipal policing and court reforms for the post-Ferguson era were struck down in a lawsuit at the Missouri Supreme Court; since then conflicting guidance from the court has resulted in an untenable status quo. And so on.

Conflict, compromise or uneasy coexistence? At some point influential players like Sinquefield and Taylor may have to choose. People familiar with the situation told McPherson that Sinquefield, Taylor and Commerce Bancshares Executive Chairman David Kemper met for dinner last autumn, when FLY314 was very much alive and it looked as if Lambert would generate several serious P3 proposals. The airport was among the subjects discussed around the table, these people said. But subsequent events showed that Sinquefield was not persuasive enough about the merits of privatization.

Despite this, in recent years Sinquefield has arguably played a bigger role than any other private citizen when it comes to setting the agenda for St. Louis. Even his critics admit he has been correct to focus on pressing issues like the airport, the misuse of tax incentives, and the region’s hopelessly fragmented governments. What they object to are the covert methods he and his team have tended to use in executing their plans. FLY314 billed itself as an “exploration” of privatization without ever explaining its disinterest in exploring other options as well. Weaknesses like this killed it.

The St. Louis area does not lack for big ideas; it lacks a coordinated team for implementing them. Over the past decade Sinquefield has learned that going up against the St. Louis establishment is a risky prospect with no guaranteed results. At the same time, even Sinquefield’s fiercest critics must realize that demonizing his agenda and attempting to isolate him are not a lasting solution, either. To get past this, conflict will need to give way to consensus. Those seated at the table will have to think less about politics, and more about old-fashioned civics. Reader, pull up a chair and get comfortable. This could take a while. –McP–

Editor’s note from Jack Grone: My interest in privatization stems from prior career experience. During the 1990s as a reporter with Dow Jones Newswires I covered privatizations in Hungary including manufacturers, electricity distributors and the national telecoms company. Later, while working in corporate communications at Credit Suisse, I briefly served as a media contact for Global Infrastructure Partners (GIP), of which Credit Suisse was a founding partner, when GIP bought London City Airport in 2006. GIP was one of 18 parties that responded to a request for qualifications during the Lambert P3 process last fall. I have not had contact with GIP or any of its executives since leaving Credit Suisse in London in 2009.

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